I’ve heard that the average household spends 10% more than they make. Having been guilty of that many many months, I’ve been working with PL over the past three months to build a household budget, cut expenses, and live within the budget. The real test starts August 1st when we pledged to stick to our budget with no cheating by moving money around from savings to checking. We’ll only have one job in the family for the next three years, plus a little extra money coming in through student loans and mileage reimbursements for work (and whatever my wonderful and generous mom shoves in my hand when I come to visit-she doesn’t even know I have a blog and I’m still nice) so living within our budget is really critical.
The first part of the project was to start figuring out where in the world our money went and why we spend so much of it. Starting in April and continuing in May and June (and looking back from January to the present too since I got bored at work one day), I looked at all of our bank statements and credit card bills and wrote down every expense and it’s category in a spreadsheet. Of course I had no clue if the money spent at the grocery store was all food or household supplies or personal care items, but that’s ok for now.
There’s a lot of free templates for expenses and budgeting on the interwebs, but I didn’t find one that listed the way that I wanted to categorize things and I found myself adding and deleting lots of things. So, I built a simple spreadsheet, showing my actual take home pay (since my real pay is only important to me on my W-2 and I just want to know how much money I can spend) and any other sources of money that came in and refecting the categories of spending that made sense to me. Here’s my budget, with the actual specifics of our income and expenes taken out.
For example, I wanted to separate yard/garden stuff out from other household things since I like buying plants but know flowers aren’t as essential as laundry detergent. I don’t buy many clothes or go see many movies, but I do sometimes pay an tattooed guy in an indie rock band $45 to cut my hair. This excercise was simple enough, but shocking. Ordering pizza on Thursdays when we were too tired to cook, stopping at Subway on the way home from church since we hadn’t been grocery shopping, and other excuses for not eating at home added up to almost $200 a month!
Doing this was also helpful because we took the time to figure out ways to save money on “fixed” expenses like internet and tv. We ditched the satellite dish and landline, and got cable internet from a different company and signed up for just the local channels. (Side note: They gave us the regular channels anyway for the same price when they hooked it up, so our secondary reason for ditching the cable in hopes of watching less tv and playing more games and reading more didn’t work out as we had planned. We still get Bravo, USA, TNT and any other channel that shows Law and Order constantly, so we’re still lazy bums. Who am I kidding? Even a few years ago when we only had 3 channels and rabbit ears, I would still watch too much tv. Golf is surprisingly fascinating when it’s the on the only channel with a clear picture.)
The next step was to start projecting how much money we should expect to be spending in each category, starting first with those things like the mortgage that are the same every month and easier to predict. Our year to date history of power bills and gas bills helped me to get to an average amount to budget, but that will always vary from month to month. This is the part of budgeting where I think most people get stuck, fail, and give up.
After tracking how much money we were spending, I was really excited to set some goals for cheaper grocery bills and less going out to eat, but quickly got frustrated when we realized it was time to get the oil changed in both cars, we had to buy a present for a wedding shower (I wish it wasn’t rude to just not buy people presents for special occasions), and the cat had to go to the vet and get one really expensive staple.
Budgets don’t work. Why don’t they work? There’s a great article on this at Getting Finances Done, that I suggest you read but their answer is this:
There are three major problems with a common budget:
1. They don’t reflect reality.
2. They don’t connect from one month to the next.
3. They don’t track the surplus money left over after all the categories are filled
My main budgeting challenge is trying to figure out a way to account for expenses that don’t occur every month like new glasses and contacts and car registrations, and to make sure we have money for those expenses when they come up. Emergencies do happen, but those things aren’t emergencies.
Budgeting programs like Quicken don’t take into account that a budget changes slightly from month to month-they just copy one month’s projection over to the next. My solution was to stick with my same budget spreadsheet and add a yearly column beside my monthly one. I only get glasses once a year, but I can guess the amount they will cost each time (a lot) and put that in the yearly column. I then divided it by 12 and put it in my monthly column. My goal is to put any surplus money in the months when those expenses don’t happen into the savings account so it’s there when it is time to pay for those things.
That’s a budgeting strategy called building a zero based budget, where every cent is allocated each month. The extra money can go into the entertainment budget if there’s enough, but without allocating it, it just disappears somehow and you don’t even remember having fun spending it.
How do I plan to keep up with all of this? Our checking account, savings account, and main credit card are all with the same bank and show up on a single online banking screen. I check my other investment accounts regularly, but don’t want to think of them as money available for expenses. I know a lot of people want everything in one place but my main goal is improving our day to day spending, so I’m not concerned with those. I also avoid having cash, since I’m a cash black hole. On the occasions when I do have cash and need it for something, I want to do better about keeping the reciepts and treating it just like regular spending.
This bank’s bill pay works well, we have direct deposit, and we pay EVERYTHING online. I can’t even find the checkbook most of the time. We can’t receive e-bills from our gas company and the county’s water bill still comes in the mail too, but we can pay them online. Our bank’s e-bill system can even cut checks to individuals. We also have another credit card with rewards that we now use for most of our day to day expenses in order to get grocery and gas money back. That’s a newer card so we’re still getting used to using that and not the debit card, and trying not to spend 2x the money by using it AND the debit card.
Since our income and expenses clear the account so quickly and you can view them online within the day, I plan to manually fill in the spreadsheet as we go along. I uploaded it as a Google doc so I can do it at home or at work and either of us can do it without having to email updated files back and forth. For the first few months, I’m also going to keep all of my receipts and make sure things get entered as we go. After that, hopefully the habit of tracking spending as it happens will become more automatic to us. I think that the Google docs spreadsheet will work great for now, and as long as we do it as we go, there isn’t much of a time commitment. As much as I like when technology can automate tedious processes, I know that unless I type in how much money we spent going out to eat, I won’t notice it as much.
While I was learning to budget my money, I did find a terrific looking program called Mvelopes that will link all of your bank accounts, allow you to manage it online from anywhere, do online bill pay, show all expenses from multiple accounts, and let you designate your spending into budget categories and recalculate as it goes along. It utilizes the “envelope concept” of budgeting, but automates it for a cashless society. It’s about $7-$13 a month depending on which plan you choose. I’m really intrigued by the program, but I’m not ready to commit to subscribing to the service until I try out my own system first.
But, here’s the sales pitch from them since I think it would really rock and track our expenses in a way that makes sense:
“Quicken and Money use the traditional after-the-fact approach, basically a month-end reconciliation of budget to actual spending. With these programs, money is assigned to spending categories only after it has already been spent. You can then run reports in order to see where your money went so you can try better “next time.” It’s a reactive approach to budgeting, which simply does not work.
The key is not only looking back to see where your money went, but also looking ahead to plan where you want your money to go. Mvelopes Personal lets you set up a spending plan, dividing your money into spending categories – based on what you plan on doing with the money – as it is received as income. Mvelopes then gives you accurate, up-to-date information for each spending category, showing actual funds available.”